"Rate Cuts Loom as Tariffs, Weak Jobs, and Policy Uncertainty Fuel Economic Unease"

The Federal Reserve is expected to implement five rate cuts by mid-2026, according to Chase Bank, as economic indicators signal a cooling labor market and inflationary pressures from recent trade policy shifts. This forecast aligns with broader expectations among major financial institutions, including Goldman Sachs and Morgan Stanley, which anticipate a series of easing measures by the central bank to stabilize economic activity.

Recent data has reinforced concerns about a weakening U.S. economy, particularly with a significant downward revision in labor market figures. The Bureau of Labor Statistics (BLS) adjusted its employment estimates for the year ending March 2025 by nearly 911,000 jobs—far exceeding the 50,000 to 60,000 downward revisions anticipated by many analysts. This revision has sparked debate about whether it reflects methodological issues with BLS reporting or a genuine slowdown in hiring activity. Jamie Dimon of JPMorgan Chase described the data as a confirmation of economic weakening and expressed uncertainty about whether a recession was on the horizon.

Despite these concerns, the labor market remains close to full employment, with an unemployment rate of 4.3% and relatively stable job-to-job transitions. However, the pace of hiring has slowed significantly, with breakeven estimates for job growth now in the range of 30,000 to 80,000 per month, down from previous estimates above 100,000. This trend has been attributed to a combination of reduced immigration, lower labor force participation, and uncertainty surrounding trade and fiscal policies. St. Louis Fed President Alberto Musalem noted that businesses have expressed hesitation in expanding their workforces due to policy uncertainty, particularly concerning tariffs.

Trade policies have played a notable role in shaping economic conditions. The Trump administration’s imposition of higher tariffs—reaching an effective rate of nearly 19%, the highest since 1933—has had a measurable but delayed impact on inflation. These tariffs have led to a modest 20% pass-through to consumer prices as of July 2025, according to St. Louis Fed economists. While some economists argue that the impact of tariffs on inflation may intensify as inventories of pre-tariff goods are depleted and final tariff rates become more certain, others, like Goldman Sachs’s David Mericle, suggest that the labor market has softened significantly and that further rate cuts are warranted to mitigate risks from weakening employment trends.

Goldman Sachs forecasts three rate cuts of 25 basis points each in September, October, and November 2025, followed by two additional cuts in 2026, bringing the federal funds rate to a target range of 3 to 3.25%. This aligns with broader market expectations and the Federal Reserve’s recent indication of a more dovish stance. The central bank’s current policy framework, outlined in the updated Statement on Longer-Run Goals and Monetary Policy Strategy, emphasizes a balanced approach between maximum employment and price stability, particularly as downside risks to the labor market rise.

Morgan Stanley’s Mike Wilson has taken a more radical view, arguing that the U.S. economy has been in a “rolling recession” since 2022, with sector-by-sector downturns masking broader weakness. This view is supported by negative median earnings growth across the Russell 3000 index and lagging indicators that fail to capture the true extent of economic pain. Wilson sees the April 2025 "Liberation Day" tariff announcement as the trough of this recession, followed by a V-shaped recovery in corporate earnings and labor market revisions. He expects the Fed’s rate cuts to catalyze an early-cycle bull market, with the potential for new all-time highs by late 2025 and into 2026.

As the Federal Reserve prepares to cut rates, the broader economic context is one of cautious optimism. While inflation has remained above the 2% target, the central bank’s forward-looking approach is designed to balance the risks between employment and price stability. The path of interest rates will depend on how inflation evolves and how quickly the labor market adjusts to shifting economic conditions. For now, the market is positioning itself for a prolonged period of easing, with the first rate cut expected in the coming months.